Bloomberg News

JPMorgan Among 65 to Register as Swap Dealers Under Dodd-Frank

JPMorgan Chase & Co. (JPM:US), Goldman Sachs
Group Inc. (GS:US) and Barclays Plc (BARC) are among the first banks to
register swap-dealer divisions under the Dodd-Frank Act, which
requires higher capital, collateral and trading standards.

The 65 trading units that have registered include the
biggest banks in the U.S., U.K., France, Germany, Switzerland
and Japan, according to the Commodity Futures Trading
Commission. The list, which is expected to grow, reflects
companies that had at least $8 billion in swap-dealing business
in October and had to register by the end of last year.

“This is at the heart of financial reform: dealers
registering and coming under common-sense rules of business
practice, reporting, capital and margin and that the public gets
to see the actual transactions,” CFTC Chairman Gary Gensler
said in a telephone interview yesterday.

The Dodd-Frank rules, more than two years in the making,
seek to improve oversight of a market that for three decades
largely escaped federal regulation. The law was enacted after
swap trades helped fuel the 2008 credit crisis and led to the
U.S. rescue of American International Group Inc.

Swap dealers will eventually face the highest requirements
for capital and collateral to back their trades and will have
the stiffest reporting and trading standards. The financial
firms that dominate swap dealing generate more than $30 billion
in annual profit, according to an estimate from consulting firm
Oliver Wyman, a unit of Marsh & McLennan Cos. (MMC:US)

Full Force

Swap dealers won’t immediately face the full force of Dodd-
Frank regulations, with capital and margin rules yet to be
completed by U.S. or international authorities. A requirement to
guarantee trades at central clearinghouses doesn’t take effect
in the U.S. until mid-March at the earliest for interest-rate
and credit trades. Rules governing swap-trading platforms have
yet to be completed. The CFTC also is still debating when Dodd-
Frank rules will apply to overseas trades.

With their registration, swap dealers will begin reporting
interest-rate and credit trades to databases. “This is changed
market behavior,” Gensler said. “As of Monday, there was the
public seeing the transaction price and volume. We had never had
that before.”

The list of 65 entities includes the biggest U.S. swaps
dealers, according to the Office of the Comptroller of the
Currency. JPMorgan leads the list with $72 trillion in
derivatives contracts outstanding at the end of September,
according to the Office of the Comptroller of the Currency. Bank
of America Corp. (BAC:US) follows with $64 trillion and Citigroup Inc. (C:US) is
third-largest with $55 trillion. There’s no comparable ranking
for banks globally.

Six Divisions

The list also includes six Goldman Sachs divisions,
including commodities trading arm J. Aron & Co. that was once
managed by Lloyd C. Blankfein, the bank’s CEO. Morgan Stanley
registered six entities, including London-based unit Morgan
Stanley & Co. International Plc.

The CFTC had estimated that there would be about 125
entities registering as dealers. “I think it’s an initial list
and that there will be others,” Gensler said.

Energy companies that lobbied on the swap dealer definition
including BP Plc, Shell Energy North America LP and Vitol Inc.
weren’t on the initial list. The CFTC in October delayed a
requirement to count energy trades guaranteed at clearinghouses
to determine if a company crossed the $8 billion threshold. “I
would anticipate over time that we would see some particularly
if people are transacting or dealing over $8 billion of swaps in
the bilateral world,” Gensler said.

Energy Traders

John Parsons, a professor at the Massachusetts Institute of
Technology, said he was surprised that Shell and BP weren’t on
the initial list because of the size of their derivatives-
trading businesses. “Presumably that will happen” as the list
grows, he said in a telephone interview yesterday. “If it
doesn’t that will be very telling about the regulations.”

Gensler said last March when the agency was preparing to
complete the rule defining swap dealers that it was “very
clear” the intent was to apply to financial and non-financial
firms.

“In the past some entities were left out of regulation
just because of what they called themselves,” Gensler said on
March 2. “I think it would be a mistake to end up with this
era’s Enron loophole, and something that might be a loophole for
others.”

In 2000, certain electronic markets were excluded from
commission oversight under the so-called Enron loophole, named
for the energy company that collapsed in late 2001. “I think it
would be a mistake to end up with what would be sort of this
era’s BP loophole,” Gensler said.